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$519 1
000 Annual Interest Rate: 15% Monthly Payment: $1 1
000 as a comparison loan amount 1
000 borrowed! Here again the total interest cost is the total payments to be made (360 x $1 1
000 borrowed. The total interest cost is the total payments (360 months x $599.55 = $215 1
000 borrowed? Or is there something more but which bankers never talk about publicly? Again the example is a $100 1
000 debt over 30 years is $2 1
000 for each $100 1
000 in interest is leveraged by the nominal method into a 30 year debt costing $653 1
000 in interest! (tables to show the data are provided by Tim 1
000 loan repaid over 30 years and at a "nominal" 15% per annum the required monthly payment is $1 1
000 loan requires 18.68 years to pay off based on monthly payments of $1 1
000 loan requires 28.67 years to pay off with monthly payments of $599.55. If the lender uses the nominal method 1
000 loan. If you signed the same document at a U.S. bank 1
000 loan. One is 93% more expensive than the other. The issue is no more or less than that. Nominal Method error is exponential or geometric In the U.S. 1
000 millions of initial capital 1
000 mortgage. Again 1
000 mortgage. If the lender claims that the stated 15% per annum is nominal and not real 1
000 or 98% will be retained by the financial middleman that makes its profit on the spread between interest money collected from borrowers and that paid out to depositors. The use of the nominal method can easily triple or quadruple the inherent profitability of the banking/credit business even after an allowance is made for greater defaults. At a nominal 60% per annum 1
000% and not 180% - a thousand-to-one difference in magnitude? It is precisely analogous (height-wise) to not being able to tell the difference between a child's doll house and the Empire State Building! The concurrent paradox is as to how the bogus “nominal” interest calculation methodology that is prohibited and criminalized in the U.K. under the Consumer Credit Act of 1974 (and multiple U.K. Criminal Code statutes) 1
000% on a payday loan as somewhere between 180% and 850% and virtually no one notices. It is arguably the single most important determinant-in-fact of their quality of life and the masses are looking straight at the Empire State Building and being told that it is a child's doll house. Yet they have no clue even that there is something wrong with the numbers. We have truly been made innumerate. There was one government (or government sponsored) study that I came across related to the payday loan industry where it was suggested 1
000% per annum. It is a fairly simple calculation and easily verifiable.[1] So what is it about the mind that allows us to function in a world where there is no more real determinant of our quality of life than interest generally 1
000) and a fixed monthly payment amount ($599.55) the only way to measure the extra cost in dollars is by the time (and total payments) required to pay off the debt/contract (the amortization period). At a real 6% per annum a $100 1
000) with the result being $115 1
000) with the result being $355 1
000. The effect is absolutely breathtaking. This is no mere technicality 1
10% per annum 1
135 at 15%). Mathematically 1
135 gained from borrowers over the 30 year period only $10 1
135 greater) based on a nominal rate of 15% (vastly more if the overpayments on the mortgage were applied entirely to credit card debt). At 6% the foregone interest on the overpayments is only the $662 difference between $9 1
135 less (or investment earnings $519 1
189.46 1
198 for a $100 1
198 over 30 years. One is 93% more expensive than the other. And the Congress calls it consumer protection! In summary and conclusion 1
198) minus the principal sum loaned ($100 1
198. Now the $171 1
198. What may appear to be a near trivial difference is actually a form of mathematically engineered leverage which increases the total cost of borrowing (cost of the contract) by 93% at a stated interest rate of 15% per annum. A mortgage or any term loan is designed with the monthly payment amount determined so as to be just slightly more than the initial (first month's) interest cost so that the loan will take 30 years (or whatever desired amortization period) to pay off. By using the nominal method 1
2 here. How can something as manifestly important as a certain way that financial institutions calculate the amount of interest due from borrowers be recognized and prohibited as criminal fraud in the U.K. 1
2010 We hold these Truths to be self-evident... Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking 1
226 or about 2% will find its way into the accounts of depositors. The remaining $509 1
226. The overpayments with interest 1
243 or about $84 million per initial $100 1
264.44 = $455 1
264.44 If you sign in the U.K. you have undertaken to pay $283 1
264.44 If you signed in the U.K. 1
264.44 per month or $171 1
264.44. If interest were at a real 15% per annum 1
264.44. If the lender uses the nominal method 1
264.55 on a $100 1
293 for a $100 1
293 over 18.68 years. If you sign in the U.S. you have undertaken to pay $455 1
436 over 18.68 years but at this higher level the error in the nominal method adds 11.32 extra years to create a debt with total interest payments of $355 1
4:03 PMLA County Nonpartisan ExaminerCarl Herman Previous Next Comment Subscribe ShareThis We hold these Truths as self-evident... Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking 1
500 to about $23 1
500.34. If the calculations are done correctly 1
500? Does a two and a half times increase in the stated rate from 6% to 15% cause a similar increase in the extra cost from $9 1
550 millions on $1 1
564 and $10 1
564 difference (the Bankers' Bonus) from the use of the nominal method therefore represents a 9% increase in the total dollar cost of borrowing 1
564 increase at 6% 1
564 per $100 1
754.17%) (^ means “raise to the power of”)) [2] The conventional power-of-two exponentiality occurs in this respect based on “calculating semi-annually”. “Calculating monthly” results in a somewhat greater relative error (about 10% per se 1
800 extra cost at 15% 1
800% in terms of extra dollars out of the borrower’s pocket from the math error 1
806 difference represents a 93.68% increase in the total dollar cost of borrowing or 48% of the total interest paid/collected over the 30 year period. The interest cost should be $183 1
806 is simply the sum of the extra 11.32 years worth of payments as if the borrower would otherwise stuff the money into a sock or under a mattress. If the lost opportunity cost is taken into account (i.e. 1
806 per $100 1
806 still owing on the contract after 18.68 years of monthly payments of $1 1
838) minus the principal sum loaned ($100 1
838. The $9 1
863 1
8:08 PMLA County Nonpartisan ExaminerCarl Herman We hold these Truths as self-evident... Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking 1
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News Politics Nonpartisan http://web.archive.org/web/20140707171117/http://www.examiner.com/article/economist-tim-madden-u-s-canadian-consumer-interest-calculation-method-a-monstrous-fraud-1-of-3 Economist Tim Madden: U.S./Canadian consumer interest calculation method a monstrous fraud. 1 of 3 March 30 1
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a careful examination of dozens of mainstream articles purporting to explain the many class-action lawsuits that have been initiated against payday loan companies across North America 1
a credit card company can gross an actual 80% per annum (at 5% per month). It can thus pay its bond-holders 1
a good start is to eliminate this systemic bias of U.S. banks to higher nominal 1
a lender may assess no more than 1.808% per month 1
a real 8.21 year debt costing $146 1
a typical large Canadian department store's use of the nominal method has boosted its total card-user debt by about $180 million. Based on the same cash flows 1
again 1
again at 2.82 percentage points on a stated 24% 1
algorithm 1
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and 0% from the other half at a nominal 0%. The average-in-fact is therefore half of 34.5% or 17.25% and not 16.1% based on a stated/nominal average 15%. In this (most extreme) example the standard deviation or average variance of the rate per contract accounts for a greater increase in percentage point gain (1.15 percentage points (i.e. 1
and also because certain other factors dictate that such a seemingly large spread is actually more appropriate than it may first appear.[1] Of the extra $519 1
and explained beautifully by many of America’s brightest historical minds. Tim’s following article is brilliant. He can be reached at: timothypmadden@gmail.com This is part 1 of 3. Part 2 is here. How can something as manifestly important as a certain way that financial institutions calculate the amount of interest due from borrowers be recognized and prohibited as criminal fraud in the U.K. 1
and explained beautifully by many of America’s brightest historical minds. Tim’s following article is brilliant. He can be reached at: timothypmadden@gmail.com This is part 2 of 3. Part 1 is here 1
and explained beautifully by many of America’s brightest historical minds. Tim’s following article is brilliant. He can be reached at: timothypmadden@gmail.com This is part 3 of 3. Part 1 is here 1
and loan fees plus the nominal method on the same loan have a truly astronomical effect.) 1
and nobody talks about it for thirty-five years? If we want to mitigate the coming (potential) hyperinflation 1
and only the nominal method 1
and still make a gross return of 70% per annum while telling the card-holder that they are paying 60%! So 1
and that revealing the real annual rate may well drive them further into depression! This is really a battle for your mind – the money is just a detail. [1] A deliberately simplified “nominal rate” example will make the principle clear. Assume that half of all loans are at a nominal 30% per annum and the other half are at a nominal 0% per annum. The average rate is a nominal 15% 1
and then again in London following closure and settlement in Hong Kong. Now your gross annual return is 155% or $1 1
and therefore higher still real 1
and to use a long enough period so as to clearly demonstrate the significance of the thing being measured. A 30 year period is used here because it is the standard amortization period on a residential mortgage in the U.S. Using $100 1
are the true measure of the benefits to the institution and cost to the borrower (and society in the aggregate). Even if a particular borrower does not have other loans to which the overpayments could be applied 1
area calculating squares rectangles formula 1
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as a matter of cold 1
assume that banks advance at a nominal 15% and pay depositors a nominal 6% so as to use the examples already covered 1
at 15% per annum the extra $171 1
at any given rate 1
augmented by the reality of having to pay $100 to get their $400 paycheck two weeks early 1
automatic 1
babbage 1
based on a disclosed/declared 24% per annum 1
binary multiplication 1
but 1
but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada. (tables to show the data are provided by Tim 1
but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada. Calculated to deceive The U.S. (and Canadian) nominal method is criminal in the U.K. for very good reasons. The following comparison has been designed so as to demonstrate the cost of the nominal method in terms of dollars out of a borrower's pocket instead of just rate differences. Because most consumer interest payments are made monthly we will deal with the application of the nominal method to monthly interest charges or "calculating monthly" as it is sometimes called in the finance business. The nominal method is also referred to as the "straight division" method because the lender takes the stated annual rate and then divides both components of the rate by the number of payment periods in a year. For example 1
but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada. Is there any more important determinant of quality of life for a typical human than the broadly-defined concept of interest? It pervades and saturates the price of everything. In the past fifty years alone 1
but at a stated annual rate of 20% it is 20 x 20 = 400 times greater 1
but once again we want to isolate the extra cost of the nominal method and so that is the assumed (or control) payment amount. At a real 15% per annum a $100 1
but so that the lender receives interest amounts equal to the annual rate disclosed/agreed to 1
but the data exceeds Examiner.com's capacity. Please contact Tim at the above e-mail to receive the tables.) Problem much greater still The structure of the analysis (thus far) also substantially understates the real economic consequences in that the extra payments made by the borrower are assumed to earn zero interest themselves. For example 1
but the data exceeds Examiner.com's capacity. Please contact Tim at the above e-mail to receive the tables.) The second column from the right in the table gives the relative increase in the cost of borrowing. Lenders may claim that money is inherently less valuable in a world with 15% interest rates than in one with 6% interest rates and that it is therefore not fair to simply compare the extra money cost of the nominal method. The $171 1
but the very air in which credit card companies breathe. Over just the past five years for example 1
but where a typical observer/player cannot tell 1
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